Obama’s road to hell

Charles K. Rowley

7 September 2009

In our monograph, Economic Contractions in the United States: A Failure of Government, Nathanael Smith and I evaluate and categorically reject the hypothesis that a failure of laissez-faire capitalism caused both the Great Depression (1929-39) and the current financial crisis and economic contraction (2008-9) in the United States and that extensive government intervention by Presidents Roosevelt and Obama provided the essential bases for economic recovery. The Great Depression and the current economic contraction were both caused and accentuated by a failure of government and state capitalism, not by any failure of laissez-faire capitalism.

A detailed review of the Great Depression clearly demonstrates that loose monetary policy by the Federal Reserve created the stock-market and the housing bubbles that collapsed in 1929 and that the Fed’s failure to maintain an adequate supply of money (M1 and M2) over the period 1929 to 1933 turned a minor recession into a major contraction. Presidents Hoover and Roosevelt exacerbated the depth and duration of the economic downturn by fiscal policies harmful to the private sector – wealth-destructive tax increases, socialist increases in government spending and dangerously rising budget deficits – as well as by interventionist industrial and labour-market policies modelled on those of fascist Italy.

As our monograph shows, President George W. Bush learned all the wrong lessons from that historical experience. From 2001 onwards, his administration, together with the Greenspan-Bernanke Federal Reserve Board, pursued crudely expansionist Keynesian fiscal and monetary policies that fuelled stock-market and housing-market bubbles similar to those of 1929. When the Federal Reserve belatedly tightened monetary policy in 2007, the bubbles burst, and economic contraction quickly followed. Like Hoover before him, Bush and the US Congress reacted by dramatically increasing the level of government intervention and by resorting to a policy of overt budget deficits.

Like FDR before him, President Obama has ratcheted up the Bush doctrine, increasing budget deficits to levels unheard of since World War II, and pursuing socialist economic policies – trade protection, nationalisation of banks, nationalisation of automobile companies, nationalisation of health-care, an unconstitutional invasion of private contracts, an expansion of union power, and economically inefficient environmental policies – that are all wealth-destructive. The Obama doctrine, if it is not confronted and halted, is guaranteed to shift the US irreversibly away from its relatively laissez-faire capitalism yet further into the state capitalism that is central to the current downturn and that ends up as a simulacrum of the stagnant social market economies of continental Europe. The Obama doctrine is a doctrine of government failure that will not be expunged this time by outright victory in a major World War that left the United States hegemonic over the world economy.

As our monograph demonstrates, the path that Obama follows is not just the road to serfdom that Friedrich Hayek warned us against in 1944. It is the road to hell for an American people whose nation was forged on a Lockeian anvil of the inalienable rights to life, liberty and property. Our monograph clearly defines a better road – a road paved by free trade, balanced budgets, low taxes, secure property rights, and laissez-faire capitalism. This indeed is the road that reflects the wisdom of the Founding Fathers. It is the road suited to a free and a proud people, the road that is built on the unshakeable foundations of individual liberty, private property, limited government, and the rule of law.

Charles K. Rowley is General Director of The Locke Institute and Duncan Black Professor of Economics at George Mason University. Read his opinion piece in today’s Daily Telegraph here.

The problem here is that the interests of government, households, and large corporations all coalesce around the need to ‘do something’. In a sense, therefore, the issue is not merely one of choosing the right economic policy, but of how interests operate in a democracy. Hayek’s arguments in the third part of ‘Law, Legislation and Liberty’ are relevant here. We need some means to prevent politicians bowing to short term interests.

Submitted by Philip on Mon, 07/09/2009 - 13:44.

As it happens, this is precisely what James Buchanan says in his endorsement.

Submitted by Richard Wellings on Mon, 07/09/2009 - 17:30.

Buchanan’s work suggests it may be possible to structure the ‘rules of the game’ such that the worst excesses of political and bureaucratic self-interest and short-termism can be mitigated. To give a simple real world example, I believe several Asian countries have constitutional limits on the size of the budget deficit. Having said this, the history of the US, particularly in the 1930s, shows how constitutions and rules can be undermined.

Submitted by Billy on Mon, 07/09/2009 - 17:53.

There are 3 flaws.1) Demographics – the American populous has crossed a chasm of proportions between wealth creators and receivers of largess. Per Alexander Tytler, there are more Obama voters every year and they now have a permanent majority. As the boomers retire they are replaced with uneducated from the country’s own failed education system and the plebes beyond its borders. The result will be akin to Balkanization not a thriving melting pot.2) Globalization – simply put; the manufacturing clusters, then the R&D, then the Academic centers. China is winning the technology war and has massive scale.3) Debt – inescapable and unmanageable future burdens. And Bretton Woods is done.

Submitted by Richard Wellings on Tue, 08/09/2009 - 18:25.

Billy – Demographic trends, particularly ageing populations, do indeed present enormous challenges for the US and other Western countries, but they are not insurmountable. Reform of the welfare state is desperately needed in particular, along with a radical deregulation of Western economies to enable them to compete more effectively. Such policies would face tremendous opposition from vested interests but it is possible for the ideological climate to change such that they would receive sufficient support to be implemented.

Submitted by Mike Wenger on Sun, 10/01/2010 - 23:44.

I’m doing a book report on the cause of the great depression and your website is really alot of help, but I am trying to find even more info. I found this article cause of the great depression but I’m not sure I believe the ‘official’ story… I’m trying to find the TRUE cause of the great depression, if you have any ideas of some other additional sources for info please hit me back.Thanks

Submitted by Peter on Mon, 07/09/2009 - 12:37.

The problem here is that the interests of government, households, and large corporations all coalesce around the need to ‘do something’. In a sense, therefore, the issue is not merely one of choosing the right economic policy, but of how interests operate in a democracy. Hayek’s arguments in the third part of ‘Law, Legislation and Liberty’ are relevant here. We need some means to prevent politicians bowing to short term interests.

Submitted by Philip on Mon, 07/09/2009 - 13:44.

As it happens, this is precisely what James Buchanan says in his endorsement.

Submitted by Richard Wellings on Mon, 07/09/2009 - 17:30.

Buchanan’s work suggests it may be possible to structure the ‘rules of the game’ such that the worst excesses of political and bureaucratic self-interest and short-termism can be mitigated. To give a simple real world example, I believe several Asian countries have constitutional limits on the size of the budget deficit. Having said this, the history of the US, particularly in the 1930s, shows how constitutions and rules can be undermined.

Submitted by Billy on Mon, 07/09/2009 - 17:53.

There are 3 flaws.1) Demographics – the American populous has crossed a chasm of proportions between wealth creators and receivers of largess. Per Alexander Tytler, there are more Obama voters every year and they now have a permanent majority. As the boomers retire they are replaced with uneducated from the country’s own failed education system and the plebes beyond its borders. The result will be akin to Balkanization not a thriving melting pot.2) Globalization – simply put; the manufacturing clusters, then the R&D, then the Academic centers. China is winning the technology war and has massive scale.3) Debt – inescapable and unmanageable future burdens. And Bretton Woods is done.

Submitted by Richard Wellings on Tue, 08/09/2009 - 18:25.

Billy – Demographic trends, particularly ageing populations, do indeed present enormous challenges for the US and other Western countries, but they are not insurmountable. Reform of the welfare state is desperately needed in particular, along with a radical deregulation of Western economies to enable them to compete more effectively. Such policies would face tremendous opposition from vested interests but it is possible for the ideological climate to change such that they would receive sufficient support to be implemented.

Submitted by Mike Wenger on Sun, 10/01/2010 - 23:44.

I’m doing a book report on the cause of the great depression and your website is really alot of help, but I am trying to find even more info. I found this article cause of the great depression but I’m not sure I believe the ‘official’ story… I’m trying to find the TRUE cause of the great depression, if you have any ideas of some other additional sources for info please hit me back.Thanks

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